Strategic partners showing interest in Medserv

Source: Times of Malta
Date: 01/07/2017

A number of companies have showed interest in the two-thirds’ shareholding being offered by oil and gas company Medserv, starting off the process by signing a non-disclosure agreement.

Directors Anthony Diacono and Anthony Duncan announced some weeks ago that they would be selling their 65.5 per cent shareholding, but Mr Diacono told The Sunday Times of Malta that they were not necessarily considering selling all the shares and might only sell part of them.

Asked whether they might consider breaking up the shareholding and selling part to a strategic investor and floating the rest on the Malta Stock Exchange, he said that “all options are open”.

However, the intention of the sale is clearly to grow the company, which means finding the right partner, seizing what he sees as the current window of opportunity.

“We have to continue growing and we feel it is in the best interest of the firm to seek a strategic partner with deeper pockets, products which can add value to make us more interesting, to consolidate the market we already have [which is becoming quite substantial] and also to enter those where they have strengths which we lack,” he said, pretty much ruling out investment by private equity or venture capital firms.

It was interesting to hear him say that now was the ‘right time’. The group reported losses before tax in 2016 and 2017, with losses – albeit lower – also forecast for 2018. But Mr Diacono is well aware that any purchasers would have enough knowledge of the macro situation to know that the industry would eventually turn around, after considerable restructuring across the whole sector.

When the cost of oil started to drop from $120 a barrel, there were mergers, consolidations and also bankruptcies. Some companies kept their eye on the eventual turnaround – including Medserv.

“We are coming out from the most difficult year we have ever had. The whole industry went through a difficult period. We took a very long-term approach to this issue and did not cut on costs. We did the opposite and kept investing in people. We retained everybody as we knew, in our best judgement, that the market would turn around,” he said, noting that employees were kept on, even in operations which were mothballed – like Portugal.

“But you cannot grow on debt alone. You have to build up your reserves again and to manage your balance sheet. It will definitely affect the growth. If we were to continue on our own, the growth would be interesting but not phenomenal as we would still be in a period of consolidation.”

One thing that Mr Diacono stressed was that the decision to sell the majority shareholding was part of a plan which was set into motion some years ago and culminated with the appointment of Karl Bartolo as CEO some months ago, after years of grooming for the position.

The intention of the sale is clearly to grow the company, which means finding the right partner

“It was always clear that the white-haired brigade had a sell-by date,” Mr Diacono said with a chuckle, referring to the way he was described in a previous Times of Malta interview.

He was a bit more pensive, however, when asked what his role would be in the event of a sale and whether he would stay on as chairman.

“I have to remain dispassionate, no matter what my heart says,” he said after a pause.

“What I do not want is to become a hindrance to the company. But helping the younger team to avoid the many mistakes I made in life  and being on the board is something I could do.”

The group is listed and headquartered in Malta but it operates in seven countries – Malta, Oman, UAE, Iraq, Cyprus, Portugal and Egypt. It is targeting new markets: a tender is currently being adjudicated in Uganda and even Mauritania is in its sights.

The group had tried to get a foot in markets further afield – Trinidad and Tobago at one stage – but the focus is now on the areas it sees as its core competencies: Africa and the Middle East.

The trick, the company believes, is to make inroads into another of the few oil companies operating in the region and recently qualified with one of the majors to be one of their five preferred bidders.

Apart from the turnaround in the oil business as a whole, Mr Bartolo also felt that it was a good time for the group to attract a buyer.

Asked whether it made sense to put yourself on the market after the worst year ever, he said that buyers would look at what was coming up ahead.

“The first thing is to win a contract. But once you do so, it only has value when you start operating. We had a mothballed position in Cyprus, for example, but once they found gas there, then the whole scenario changes as now we know what drilling is going to take place over the next two or three years,” he said, days before another positive announcement about operations in Cyprus.

The other consideration for buyers is the financials, as the group is quite leveraged. Debt has gone up from €49 million to €54 million due to various investments in Egypt and locally in Malta.

Mr Bartolo puts this in the context of performance: “Current earnings from last year seem very tight but when you look at the growth areas and our earnings for this year, the level of cover increases. For example, if your earnings are €4 million and your debt is €50 million, it is quite different if earnings go to €10 million.

The group is forecasting profitability of €2.2 million by 2019  and the interim report issued on April 30 showed considerable growth in turnover in the first quarter, from €7 million in 2017 to €8.3 million this year.

“Watch this space when we announce our next results!” Mr Diacono added.

The group is also intending to pay dividends in 2018, a decision which Mr Diacono defends by referring to the minority shareholders who hold the remaining shares on the Malta Stock Exchange, who took the knock in the past when Medserv decided to invest in the future rather than giving dividends.

Mr Bartolo added that the group was still in positive Ebitda, which he considers to be the key performance indicator for a company like Medserv.

“The group has become more and more complex as it has grown, so there is a large amount of accounting there which is not cash-related. Ebitda is the key number to show you the operations. The rest is all about accounting and timing.

“One simple example is depreciation of assets. This is not the hotel industry where rooms look tired after five years and need to be upgraded.  If you have a certified crane, its useful life is considerably longer than accounting standards would indicate,” he said.